Strategy 04 Latha Chari

7/31/2019 Strategy 04 Latha Chari

http://slidepdf.com/reader/full/strategy-04-latha-chari 1/21



22

Introduction:

Today, the business environment is rapidly changing with respect to

competition, products, people, process of manufacture, markets, customers and

technology is embedded in all these functions. It is not enough if companies

keep pace with these changes but are expected to beat competitors and innovate

in order to continuously maximize shareholder value. Inorganic growth

strategies like mergers, acquisitions, takeovers and spinoffs are regarded as

important engines that help companies to enter new markets, expand customer

base, cut competition, consolidate and grow in size quickly, employ new

technology with respect to products, people and processes. Thus the inorganic

strategies are regarded by companies as fast track strategies for growth and

unlocking of value to shareholders.

Post liberalization and reforms, the Indian corporate sector had to restructure,

reengineer, innovate to be competitive and to deliver value to stakeholder. This

led to increase in mergers and acquisitions in the Indian corporate sectors. The

acquisitions of late have been global in nature with big deals like Tata steel

acquiring Corus, etc. and Indian companies going global.

The question of whether mergers and acquisitions pay, who gains more out of

the deal, is of prime importance both to the management and investors. Finance

literature is full of a variety of studies conducted by researchers across the globe

addressing this question. A review of the findings of such studies done with

respect to mergers in UK and USA shows that M&A destroys value in most

cases. With heightened M&A activity happening in the past decade in India, it is

important to know about the profitability of M&A in India, which is the

objective of this paper. This paper we have looked at 12 cases of acquisitions

during the period from 2000 to 2006.

Literature review:

Definition and classification of inorganic growth strategies:

In finance literature the growth strategies followed by companies can be broadly

classified into organic and inorganic growth strategies. Organic strategies refer

to internal growth strategies that focus on growth by the process of asset

replication, exploitation of technology, better customer relationship, innovation

of new technology and products to fill gaps in the market place. It is a gradual

growth process spread over a few years (Bruner, 2004) . Inorganic



33

Figure 1 : Growth strategies – Classification

growth strategies refer to external growth by takeovers, mergers and

acquisitions. It is fast and allows immediate utilization of acquired assets.Bruner (2004) . It is less risky as it does not result in expansion in capacity. The

classification of inorganic growth strategies is given in figure 1 above.

Forms of acquisitions: Acquisitions can take a variety of forms. They can be

either mergers or consolidation or acquisition of assets or equity. (Damodaran,

2002)

Or anic Strate ies Inor anic Strate ies

Takeover/Acquisition Joint Venture

Strategic

Alliance

Growth Strategies

Mergers

Horizontal Vertical Con lomerate

Acquisition

of assetsAcquisition

of shares

New Market New Technolo New customersAsset

replication

Proxy

Context

Going

private



44

A merger refers to the absorption of one firm by another, i.e. the acquiring

firm retains its name and its identity, and it acquires all of the assets and

liabilities of the acquired firm. The acquired firm ceases to exist as a separate

business entity. As opposed to this in a consolidation, a new firm is created,

both the acquiring and the acquired firm terminate their legal existence and

become part of a new firm. Here, the distinction between the acquirer and the

target firm is not crucial

Acquisition of stock refers to purchase of a firm‘s voting stock in exchange for

cash, shares, or other securities; this may start as a private offer from the

management of one firm to another. A tender offer is a public offer to buy

shares of a target firm directly from its shareholders. Tender offers are usually

unfriendly; they are used in an effort to circumvent the target firm‘s

management, which is usually actively resisting acquisition

Acquisition of assets refers to a method of acquisition where a firm can acquire

another firm by buying all of its assets. Generally, a formal vote of the

shareholders of the selling firm is required. Acquisition of assets avoids the

potential problem of having resisting minority shareholders, which can occur in

an acquisition of stock.

Proxy contests occur when a group of shareholders attempts to gain controlling

seats on the board of directors by voting in new directors. A proxy authorizes

the proxy holder to vote on all matters in a shareholder meeting. In going-

private transactions, all the equity share of a public firm is purchased by a small

group of investors (e.g., the incumbent management via an LBO). The shares

are de-listed from stock exchanges.

Mergers can be further classified into:

• Horizontal merger: Takes place between two firms in the same line of

business (e.g., Daimler-Benz and Chrysler, Hewlett-Packard and Compaq)

• Vertical merger: Involves companies at different stages of production

(e.g., America Online and Time Warner)

• Conglomerate merger: Involves companies in unrelated lines of businesses

(e.g., AT&T and NCR)





66

significant gains because of the fact that the size of the buyer company is too

large to actually make a material impact in value to shareholders.

Accounting studies use financial measures like Return on Equity, Return on

Assets, Earnings per share, calculated from audited financial statements. These

are compared for a time series before and after the event and also compared

with peer group companies for the period in order to ascertain whether acquirers

outperformed non acquirers. The method suffers from deficiencies that relate to

accounting measures like being a lagging measure of value, does not consider

intangibles and is subject to accounting bias. Healy, Palepu and Ruback (1997)

studied 50 large mergers in the US using accounting based measures. They have

reported that merged firms showed significant abnormal improvement in asset

turnover. However, there was no improvement in operating cash flow margins.

They also looked at market returns to shareholders and concluded that the Net

present value for the acquirer shareholders was zero as the cash flows did not

improve. The target company shareholders gained significantly. Chatterjee and

Meeks (1996) who studied mergers in UK concluded that the acquiring

companies did not show any significant increase in profitability though they

reported better accounting profits, which could be because of accounting policy

changes. Sharma and Ho (2002) compared the ROE, Profit margin and EPS of

Australian companies for a period of 3 years before merger and three years after

merger and concluded that buyers showed decline in these measures after

merger. Revenscraft and Scherer [1987] conclude that, on average, acquiring

firms have not been able to maintain the pre-merger levels of profitability of the

targets. Ali and Gupta (1999) examine the potential motives and effects of

corporate takeovers that occurred in Malaysia during the period 1980 through

1993 and find that the acquire r firms have achieved larger size at the expense of

reduced profit both for themselves and the acquired firms. Hence, summing the

studies reviewed it can be said that most of the studies have concluded that

based on accounting numbers the mergers have not resulted in significant

benefits to the acquirers.

Survey of managers’ method is one where a questionnaire is administered

across a sample of chief executive officers and findings are based on views

given by them. The method has the advantage of looking at mergers from the



77

view point of managers and can reveal new insights into motives and

achievements derived from such deals. However, the views of the officers may

be biased or casual and need not be correct or based on scientific reasons.

Hence, the findings can be distorted. Bruner (2004), initially conducted a

survey of 50 executives, and found that only 37% of the respondents felt that the

deals created value for the buyers and 21% of the deals achieved strategic goals.

However, when he conducted the same survey among executives who were

involved in the merger he found that 58% of the respondents believed that their

own deals created value and 51% believed that they achieved their goals. Only

23% believed that they did not create value and 31% believed that they did not

achieve their strategic goals.

Clinical studies are basically case studies that look into a specific merger deal

and examine them with references to the goals of the deal and whether they

were achieved from a strategic, financial and organizational perspective.

From the above literature study it can be seen that event studies have shown

mixed findings with bias towards gains to target company, whereas most of the

accounting based studies have shown that the buyers have not gained

significantly post merger. The findings of clinical studies cannot be generalized

and those of survey is mixed and highly influenced by the sample selected for

the survey. Hence, we conclude that even based study and accounting study

methods are superior and give better results.

Research methodology: In this paper we have selected a sample list of 12

cases of acquisitions over the period from 1999 to 2005 in India. We have

adopted both event based method and accounting based method to evaluate the

success or failure of the merger. The listing of the sample and nature of study

done is given vide Table 1 given below:



88

Table -1 : List of Cases used for the study and nature of study done

ACQUIRER TARGET DATE *DATE OF

OFFER

DATE OF

CLOSUR

E

SWA

P

RAT

E

NO OF

SHARES

Mode

of

Payme

nt

PRICE

%

Stake

Acquire

d

% stake

after

acqui-

sition

Nature

of study

Market

price Rs.

Date

Acquisition

premium Rs.

CADILA

HEALTH

GERMANREMEDIES,RECON HEALTHCARE(WINTAC

LTD),

1-Aug-01 18-Jul-01 16-Aug-01 7:04 1649179 CASH 650 20% 47.72 Both400.3

29-7-01249.7

ASAHI INDIAGLASSLTD

FLOATGLASSINDIA Ltd

22-Sep-01 15-Nov-01 14-Dec-01 NA 19507008 CASH 11 25% 100% Both8.4522.8.01

2.55

COSMO FILMSLTD

GUJARATPROPACK LTD

1-Apr-02 15-Nov 01 14-Dec-01 NA CASH 29.25Accounting

GULF OILCORPORATIONLTD

GULF OILINDIA LTD

1-Jan-02 1:02 58,70,000SHAR ES

61.70%Accounting

ITC LTD

ITCBHADRACHALAM PAPER

BOARDS LTD

1-Apr-01 1:16 20,96,982SHAR ES Acc

AARTI

INDUSTRIESLTD

ALCHEMIEORGANICS LTD

1-Apr-01 1:04 5,12,525 Acc

J K INDUSTRIESLTD

VIKRANTTYRES LTD

1-Apr-02 9:20 28,94,244Accounting



99

MANALI

PETROCHEMICALS LTD

SPIC ORGANICSLTD

1-Apr-00 1:01 4,86,08400Accounting

GRASIM

(ULTRATECH)L & T

30-May-

027-May-03 5-Jun-03 50781973 CASH 190 20% 34.23 Both

173.95

29.4.0216.05

SOFTWARE

SOLUTIONS

INTEGRATEDLTD

APTECH 16-Jun-03 3-Apr-03 2-May-03 3695390 CASH 49.75 20 47.18 Both23.7515.5.03 26.00

COROMANDALGODAVARIFERTILIZERS

19-Nov-03 11-Sep-03 10-Oct-03 6400000 CASH 124 20 63.13 Both49.215.10.03

74.80

WEST COAST

RAMA NEWS

PRINT &PAPERS LTD

6/9/2003 29-Oct-03 27-Nov-03 46526426 CASH 8.13 20 53.85 Both8.051.08.03

0.08

Both

* REFERS TO DATE OF ACQUSITON/MERGER



101

Methodology – Event study: The method adopted for event based study is as

follows:

We have evaluated the performance of the merger/acquisition in terms of who

benefits from the deal using market based share prices and only those cases

where both target and acquirer are listed companies .Event study mechanism

has been applied to 6 companies out of our total set of 12 companies as only

these cases suitable data required for event study was found. We have taken

share prices of target company for a period of 12 months before the

announcement date or effective date of merger. We have also provided for the

noise prevailing during the announcement period by excluding the prices of

shares for 1 month before and after the announcement date, thus eliminating the

noise effect to quite a good extent. This methodology is discussed by Weston

(1998). We have also taken the share prices of the target company for a period

of 12 months after the said date to evaluate post merger impact on the company.

Similarly we have taken the event window for the acquiring company as 1year

before the announcement date, 1 year and 2 years after the announcement date.

The abnormal returns have been calculated using the Capital asset pricing model

(CAPM)

The various inputs required by the CAPM for arriving at the expected return

are the risk free rate, equity risk premium and beta, which have been calculated

by us as follows:

Capital asset pricing model formula:

Expected s return=Risk less return +Beta *(Market risk premium)

r = r f + (β × (r m - r f )) …………(1)

Where, r f is the risk free rate

r m is the expected return on the market and

β is the beta of the cash flows or security being valued and beta of market will

be 1.

The term (r m - r f ) is the market risk premium.



111

Equity Risk premium: Equity risk premium is an important concept and its

numerical value enters into many decisions made by financial managers,

economist and analysts. It is widely used to forecast the growth of investment

portfolios over the long term. It is also used as an input to the cost of capital in

project choice, and employed as a factor in the expected rate of return to stocks.

Given the importance of equity risk premium, the estimation in practice is very

haphazard mainly because of lack of reliable data. The total returns index

needed for the estimation of the market return for Indian market is available

only from1999. Unavailability of long periods of historical data introduces noise

and error in the estimation of the risk premium. These issues have been

addressed by JR Verma and S K Barua, (2006), where they have estimated

equity risk premium after constructing their own total return index. The concept

of estimating the premium for emerging markets using country risk premium

have also been introduced by Aswath Damodaran where the issues of differing

time frames and choosing between arithmetic and geometric means have also

been considered. We have estimated the risk free rate using 10 year G-Sec and

91 days Treasury bills. For the market return we have taken the total returns

index(S&P CNX NIFTY). Details as given below:

Estimating Risk free rate - Return given by risk free investments. It is interest

rate that it is assured and can be obtained by investing in financial instruments

with no default risk. However, the instrument can carry other types of risk, e.g.

market risk, liquidity risk etc. For truly risk less the instrument must be free

from default and market (interest rate) risks. Instruments issued by government,

does not have any default risk. The 10 year Government security (G-sec) has an

built in reinvestment risk. For dealing with that problem, we have calculated the

historic 10 year rate and subtracted from it historic 91 days treasury bill rate,

thus arriving at a better estimate for the risk free rate.

Estimating the Market return (Rm)

For estimating the market return we have taken the index values of total return

index(S&P CNX NIFTY) which were available from 1999. We have taken the

S&P CNX NIFTY and not the SENSEX mainly because SENSEX is price

index and not the total return index. The price index clearly understates the

return in the stock market because it omits the dividend payments. Thus the

total return index becomes a more correct measure for estimation of market



121

return. For calculating the Rm, we have taken the month end values of the nifty

and noted the percentage change over the previous month. We have then

annualized it and calculated the arithmetic mean, thus getting market return for

each year starting from 1999 to 2007. The data for total return index values is

taken from the NSE website.

Estimating the Beta:

We have estimated the beta of the sample companies by following the

regression method. By regressing the share price data available for the relevant

year of the study with the market return for the respective year the beta for the

company has been estimated.

Estimating the Equity risk premium (Rm-Rf)

After estimating the risk free rate and the market return, the market premium is

simply the difference between the two. The premium so calculated is not real, it

has inflation too built into it. For calculating the real equity premium we would

need to calculate the real risk free rate and real return index values. For that we

would have to take the help of Fisher’s equation:

(1+n)= (1+i) (1+r) ……… (2)

Where,

N=nominal interest rate

i=inflation rate

r=real interest rate

The inflation rate can be calculated using the WPI index

WPI (i+1) =WPI (i) (1+i) …….. (3)

Methodology – Accounting study:

For accounting based studies we have used accounting ratios as a tool for

evaluating whether the mergers have benefited the acquirers in terms of

profitability, operational costs, asset utilization with respect to fix and working

capital assets and market share. Further, we have also looked at whether the

merger has resulted in creating more wealth for the shareholders. These ratios

have been calculated for the period of 1 year before and 3 years after merger.

We have benchmarked them against the performance of the industry in order to

evaluate whether they have succeeded or not. The benchmarking has been done

with a view to assess whether the acquisitions have created more value for the

acquirers than in comparison with cases where no acquisitions have been done.



131

The financial data for the different companies is taken from the Capital line

database.

Results of the study

a) Event study:

The event study examines the gains to the target and the acquirer company

taking into account only those transactions which were all cash deals. Further,

in these cases the target company continued to operate after the sale of a

specific percentage of stock to the acquirers till further stake was acquired and

control transferred to the acquirer. The results of the event study are given in

table 2 and table 3 below.

Table – 2: Event study gains to the target company (all cash deals)

Sl.

No. Acquirer TARGET

% Stake

Acquired

Price

Paid

Rs.

Market

Price

Rs.

Premiu

m Rs.

Premium

%

12

monthsPre

announce

ment *

12

months

Postannoun

cement

*

1CADILA

HEALTH

GERMAN

REMEDIES,R ECONHEALTH

CARE

(WINTAC

LTD),

20% 650 400.3 249.7 62% -22% -1%

2

ASAHI

INDIA

GLASSLTD

FLOATGLAS

S INDIA LTD25% 11 8.45 2.55 30% 0% 16%

3GRASIM(ULTRATECH)

L & T 20% 190 173.9 16.05 9% -41% 25%

4

SOFTWAR E

SOLUTIONSINTEGRAT

ED LTD

APTECH 20% 49.8 23.75 26 109% -46% -35%

5COROMANDAL

GODAVARIFERTILIZERS

20 124 49.2 74.8 152% 88% -8%

6WESTCOAST

RAMA NEWSPRINT &

PAPERS LTD

20 8.13 8.05 0.08 1% 73% 34%



141

Table -3 : Event study gains to the acquirer.

No Acquirer TARGET

Market

price

before1

Month

Market

price

after 1Month

%profit

or

loss

% Stake

Acquire

d

12

monthsPre

announc

ement *

12

monthsPost

announc

ement *

2 yearpost

acquisi

tion *

1

CADILA

HEALTH

GERMAN

REMEDIES,

RECON

HEALTHCARE(WINT

AC LTD),

96.5 92.85

3 20% -46% -4%

2

ASAHI

INDIA

GLASSLTD

FLOATGLA

SS INDIA

LTD

295 204.05

- 31 25% -69% -92% 166%

3

GRASIM(ULTRATEC

H) L & T

302.2 305.5

1 20% -10 51% 321%

4

SOFTWARESOLUTIONSINTEGRATE

D LTD APTECH 62.85 112.1 78 20% -81 47% 71%

5

COROMANDAL

GODAVARIFERTILIZER S

94.6 118.1

25 20 -75% -5% -54%

6

WEST

COAST

RAMA

NEWSPRINT &PAPERS

LTD

180.2 208.4

16 20 60% -33% 108%

* Represents abnormal excess returns calculated before and after 12 months from the date of acquisition

From Table 2 it can be seen that most of the target company shareholders other

than shareholders of Grasim and L&T have gained an acquisition premium

ranging from 30% to 152%. Those shareholders who held on to the company

shares for a period of 12 months from the date closure of the deal have not

gained much. The excess abnormal returns on the shares over a period of 12

months post deal, is less than the immediate premium gained by the

shareholders of the target company.

The results of gains to acquirer company shareholders as shown by annexure 3,

shows that over a period of 12 months after the acquisition date only 2 out of

the 6 cases give a positive abnormal return. The results over a period of 2 years

post acquisition are however encouraging for the acquirer company

shareholders. 5 out of 6 cases show a positive abnormal excess returns.



151

b) Accounting study:

The results of accounting study are given vide Table 4. The question of whether

the profitability of the acquiring company has improved subsequent to the

acquisition has been evaluated using the Cash Profit margin % (CPM) and profit

margin before interest and taxes % (PBITM). The sales growth of the two

individual companies before merger has been compared with the sales growth of

the combined firm post merger. The efficiency of utilization of assets has been

assessed using the fixed asset turnover ratio. Similarly, the debtors and

inventory turnover ratios are used to measure the efficiency with respect to

working capital management. The value to shareholders has been measured

using the Return on capital employed % (ROCE) and return on net worth %

(RONW).

From Table 4 it can be seen that the sales growth of the combined entity was

negative in the first year after the acquisition in case of 3 out of a total of 8

cases and positive for the others. However, all cases reveal a positive growth in

sales from the second year onwards. 4 cases show a high growth in sales in the

second year after the acquisition. The PBITM and CPM percentages compared

with the pre-acquisition % and the benchmark of the industry shows that only in

4 cases the profits margins have improved. In the balance cases the profit

margins have fallen both against the benchmark and the pre acquisition margins

in the first year following the acquisition. The results with respect to margins do

not undergo any changes in the subsequent years also. Hence it can be said that

the companies do not gain any significant cost advantage due to acquisitions.

The fixed asset turnover ratio of the cases show that 5 companies had a fixed

asset utilization ratio that was better than the bench mark before the acquisition,

whereas in case of 4 companies the asset turnover has improved significantly in

the first year after acquisition and the years following it. In the case of ITC

Badrachalam and ITC the asset turnover has fallen and has not shown any

improvement. Surprisingly, all the cases of acquisitions have shown

improvement in working capital management subsequent to the acquisition. The

value to the shareholder, as measured by ROCE and RONW, show that in 7 out



161

of 8 cases the returns to shareholders was better than the benchmark and

improved in the years after the acquisition.

Table 4 : Summary of results of accounting study

Key Ratios Before merger After Merger Benchmark Comments

Target Acquire

r

Bench-

mark

Acquirer Industry

1. Gulf oil and

gulf oil India

2001 2001 2001 2004 2003 2002 2004 2003 2002

Sales Growth -%

-7.92 13.3 3.55 60.79 27 -44 falls in year 1following M&A, then

picks up

Long Term

Debt-Equity

Ratio

0.13 0.59 0.57 0.27 0.35 0.34 0.09 0.17 0.37 n benchmark

Fixed Assets 7.69 2.43 8.17 2.85 2.84 2.27 7.97 7.35 6.87 Less than benchmark,

improved two yearsafter merger

Inventory 5.1 6.55 14.79 6.48 5.69 4.89 16.52 15.55 14.3 Less than benchmark improved two years

after merger

Debtors 2.33 4 20.43 4.82 3.94 3.12 31.38 25.49 20.46

PBITM (%) 3.89 -1.81 2.92 3.17 5.73 7.94 4.42 3.56 5.7 was bad earlier, but

improved after merger

CPM (%) 1.54 -5.69 1.88 2.42 4.73 4.51 3.48 3.01 3.88 more than doubled

ROCE (%) 8.44 -2.88 16.3 6.37 9.8 9.95 39.05 27.73 33.7 negative before, but

improved after merger

RONW (%) 1.83 -18.75 11.01 1.69 8.71 5.25 28.02 21.33 26.78

2. Godavari &

Coromandal

2003 2003 2003 2006 2005 2004 2006 2005 2004

Sales Growth % -25.75 -11.06 23.88 28.6 -9 falls in year 1following M&A, then

picks up

Long TermDebt-Equity

Ratio

1.62 0.31 0 0.72 1.515 1.685

0 0 0 < bench, borrowingshave increased

Fixed Assets 4.01 1.82 1.63 5.295 4.205 3.51

5

1.09 1.01 0.87 improved

significantly

Inventory 4.34 5.23 0.82 8.16 7.82 6.4 7.92 7.57 6.21 improved

significantly

Debtors 5.05 5.82 5.1 15.38 10.165 7.02 6.62 6.91 5.23 improved

significantly

PBITM (%) -0.14 10.01 9.5 5.63 5.015 5.45

5

6.66 7.55 7.98 fallen

CPM (%) -0.78 7.19 -6.36 4.28 4.125 3.74 -1.73 -1.71 -1.95 fallen but better than

benchmark

ROCE (%) -0.45 16.17 -12.22 16.1 14.01 14.2 0.12 0.14 0.01



171


Target Acquire

r

Bench-

mark

Acquirer Industry

3

RONW (%) -20.02 12.16 24.53 18.055 12.39

0.13 0.2 0.02

3. aarti andalchemie 2001 2001 2001 2004 2003 2002 2004 2003 2002

Sales Growth 12.5 16.98 6.4 38.86 6 falls in year 1

following M&A, then picks up

Long TermDebt-Equity

Ratio

0.61 0.51 1.31 0.48 0.47 0.52 1.46 1.86 1.71 same as before but better than

benchmark

Fixed Assets 1.4 2.11 1.43 1.97 2.17 1.94 1.46 1.4 1.42 fallen but betterchmark

Inventory 4.37 9.97 3.68 7.13 8.63 8.66 4.81 5.1 4.04 improved

Debtors 8.02 4.22 5.51 4.64 5.3 4.77 6.07 5.57 4.99 improved

PBITM (%) 3.11 11.29 6.34 12.38 11.91 14.3

8

9.93 7.1 5.69 improved

CPM (%) 0.27 9.92 2.81 10.57 9.96 12.58

8.62 4.71 2.14 improved

ROCE (%) 4.18 16.11 8.4 18.29 20.39 21.3

8

12.7 9.41 6.87 better than

benchmark

RONW (%) -8.97 16.92 -5.73 22.46 21.88 24.01

15.52 3.19 -10.6 better than benchmark

4 Spic and

Manali

2000 2000 2000 2003 2002 2001 2003 2002 2001

Sales Growth -22.29 23 6.71 1.45 2.23 falls in year 1following M&A, then

picks up

Long Term

Debt-Equity

Ratio

1.79 0.53 1.18 0.86 1.25 1.08 0.66 0.93 1.09 reveals consolidated

debt, > benchmark

Fixed Assets 1.14 1.17 0.9 1.1 1.04 1.36 1.18 1.05 1.1 improved in the firstyear after merger,

later, same as benchmark

Inventory 5.08 5.77 5.5 6.57 4.87 5.77 6.82 5.6 5.72 not materiallydifferent from the

benchmark

Debtors 5.8 4.66 5 5.4 4.98 6.13 6.33 5.23 5.64 better after merger,

but not better than benchmark

PBITM (%) 3.3 1.38 5.23 -1.58 0.28 -1.19 6.79 6.27 6.46

CPM (%) 3.11 1.82 2.99 0.53 2.08 0.07 7.17 5.17 5.12 lower than the benchmark both

before and after themerger

ROCE (%) 0.01 0.011 0.12 0.14 0.15 0.01 8.98 6.65 7.47

RONW (%) 0.042 0.05 0.067 0.05 0.02 0.04 6.44 0.3 0.61

5. Float glass

and asahi

2002 2002 2002 2005 2004 2003 2005 2004 2003

Sales Growth 29.33 5.24 20.17 21.49 9.22 high growth in sales

after merger



181


Target Acquire

r

Bench-

mark

Acquirer Industry

Long Term

Debt-Equity

Ratio

7.83 1.35 1.33 1.44 2.22 2.56 1.06 1.65 2.1 Deteriorated post

merger

Fixed Assets 0.55 1.34 1.22 0.92 0.85 1.1 0.96 0.89 1.09 ATO has fallen but

better than the

benchmark

Inventory 4.45 6.64 6.66 6.01 5.63 7.28 5.99 5.8 7.31 as good as before

Debtors 13.07 17.96 14.28 9.91 10.44 13.74

10.15 10.8 13.42 better than benchmark

PBITM (%) 8.33 9.6 5.01 13.17 14.43 10.2 12.01 13.55 9.69

CPM (%) 13.18 12.47 8.53 17.54 21.63 17.5

8

16.51 20.44 17.25 better & continues to

be better than

benchmark

ROCE (%) 5.62 16.3 6.57 17.12 19.41 16.12

14.89 17.37 13.32

RONW (%) 20.25 31.61 3 50.98 68.92 62.7 32.23 41.26 32.51

6. Jk Tyres

and Vikranth

2002 2002 2002 2005 2004 2003 2005 2004 2003

Sales Growth 29.97 1 17.76 9.9 -27 falls in year 1

following M&A, then picks up

Long Term

Debt-EquityRatio

1.49 0.74 0.7 1.41 1.33 0.84 0.68 0.68 0.67 was higher than

benchmark, postmerger same as

benchmark

Fixed Assets 1.5 1.23 1.96 1.59 1.57 1.26 2.26 2.25 2.08 was below

benchmark, hasimproved after

merger but <

benchmark

Inventory 9.25 7.24 8.23 11.29 11.49 10.1

3

8.58 8.57 8.8 was below

benchmark, hasimproved after

merger

Debtors 5.58 6.73 6.83 5.54 5.19 5.35 8.15 7.75 7.18 "

PBITM (%) 3.01 8.61 6.49 2.64 4.56 6.96 3.95 5.28 6.86 was better but noe

below

CPM (%) 0.76 3.72 4.18 3.04 3.29 4.02 3.93 4.38 5.06 was below contn to

be below

ROCE (%) 5.05 8.77 11.88 5.34 8.42 9.31 9.43 12.1 14.28 improved in 1 year

and then starteddecline

RONW (%) -11.1 2.69 5.62 2.21 2.83 3.27 7.37 9.28 10.96

7. G. Propack

and Cosmo

2002 2002 2002 2005 2004 2003 2005 2004 2003

Sales Growth -20.4 23.74 24.71 -0.63 35 significant

improvement in 1st

year

Long Term

Debt-Equity

Ratio

2.59 0.67 0.33 1.3 1.62 1.37 0.44 0.4 0.33 was as good as

benchmark, but then

on started falling

Fixed Assets 1.05 1.17 0.95 1.1 0.99 1.48 0.96 0.97 1.01 was better, now as

good as benchmark



191


Target Acquire

r

Bench-

mark

Acquirer Industry

Inventory 9.23 8.21 7.44 8.81 8.76 10.8

7

8.24 7.91 8.27 improved, better than

benchmark

Debtors 7.97 6.55 10.1 8.29 7.45 9.11 10.87 11.93 11.04 improved but still

below benchmark

PBITM (%) 10.12 18.82 10.73 4.96 13.9 22.24

11.18 13.79 8.82

CPM (%) 4.62 18.08 11.78 11.3 17.92 17.7

2

12.98 14.02 7.16 better than

benchmark

ROCE (%) 14.84 22.88 7.06 6.52 16.21 37.84

8.75 10.55 6.61

RONW (%) 0.73 25.54 5.17 9.45 30.56 50.05

8.6 9.9 1.05

8. Badra.paper

& ITC

2001 2001 2001 2004 2003 2002 2004 2003 2002

Sales Growth 36.04 9.18 9.05 16.99 5.4 falls in year 1

following M&A, then

picks up

Long Term

Debt-Equity

Ratio

0.75 0.12 0.16 0.01 0.03 0.06 0.03 0.05 0.09 improved

Fixed Assets 0.77 4.07 4.68 2.66 2.82 3.23 2.92 3.11 3.58 was better, has fallen

after merger

Inventory 6.92 8.36 8.51 8.48 9.06 8.46 8.8 9.33 8.43 same as before

Debtors 11.17 77.8 54.89 51.28 53.35 65.5

6

47.35 46.45 50.72 improved

PBITM (%) 11.85 19.6 16.23 19.92 19.02 18.8

8

17.84 16.79 16.78

CPM (%) 11.01 13.2 10.83 15.53 14.59 14.11

13.74 12.8 12.3 better throughout

ROCE (%) 8.66 44.1 41.58 39.58 41.69 41.4

4

39.25 40.62 40.35

RONW (%) 6.86 32.43 32.18 27.34 28.41 30.4

3

27.32 28.44 30.59

Conclusions and limitations:Based on the results from the event study it can be concluded that the target

company shareholders gain immediately on the basis of the high premium they

receive from the acquirer on acquisition. However, the acquirer company’s

shareholders gain abnormal returns over a period of 2 years. The accounting

study results however vary very much from the event study results. As per the

accounting study, it can be seen that though the returns to shareholders based on

the ROCE and RONW show improvements, only about 50% of the companies

show significant improvement in fixed asset utilization and cost reduction due

to acquisition for the acquirer. Most acquirers have however shown significant

improvement in working capital management. Overall the improvements

achieved by Indian M&A’s as compared to those in other nations seem to be

better over a period of 2 years post acquisition. The limitation of the study is



202

that the sample size is small and can be increased. Further, a statistical inference

based on paired t test can be conducted over a larger sample to conclude better.

References:

Ali, R. and Gupta, G. S., (1999), “Motivation and Outcome of Malaysian

Takeovers: An International Perspective,” Vikalpa, 24(3), pp. 41-49.

Asquith, P., (1983), “Merger bids, Uncertainty, and stockholder returns”,

Journal of Financial Economics, Vol. 11(1, April): pp. 51-83.

Damodaran, A., (1999), Unpublished working paper, “Equity risk

premium”, New York University, New York, NY, 1999 - stern.nyu.edu

Beitel P., Schiereck, D. and Wahrenburg, M., (2002), “Explaining the M &

A- success in European bank merger and acquisitions”. Working paper,

University of Written/Herdecke, Germany (January).

Berkovitch, E., and Narayanan, M., (1993)., “Motives for takeovers: An

empirical investigation”, Journal of Financial and Quantitative Analysis

28(3): 347 - 362

Bruner (2004). Applied Mergers and Acquisitions, John Wiley & Sons, Inc.,

Hoboken, New Jersey pp. 45-50.

Chatterjee, R., and Meeks, G., (1996), “The Financial effects of takeover:

Accounting rates of return and accounting regulation”, Journal of Business

Finance & Accounting. 23(5/6, July):851-868.

Damodaran, A., (2001) Corporate Finance: Theory and Practice, Second

Edition, published by John Wiley & Sons, Inc.

Damodaran, A., (2002) Investment Valuation, Tools and Techniques for

determining the Value of Any Asset, John Wiley & Sons, Inc, 2 ed,.

Healy, P., Palepu, K., and Ruback, R., (1997), “Which takeovers are

profitable: Strategic of financial?” Sloan Management Review 38(4,

summer): pp.45-57.

Houstan J., James, C., and Ryngaert, M., (2001), “Where do merger gains

come from? Bank mergers from the perspective of insiders and outsiders”,

Journal of Financial Economics, Vol. 60(2/3, may/June): pp. 285-331.

Verma, J. R., and Barua, S. K., (2006) , “A First Cut Estimate of Equity

Risk Premium in India”, Working Paper, June 2006.



Lang, L.R., Stulz, R. M. and Walkling, R. A., (1989), “Managerial

performance, Tobin’s Q, and the gains from successful tender offers”,

Journal of Finance Economics Vol. 24: pp. 137 – 154.

Loughran, T. and Vijh, A. (1997), “Do long-term shareholders benefit from

corporate acquisitions?”, Journal of finance, Vol. 52, December: pp. 1765-

1790

Sharma, D. and Ho, J., (2002). “The impact of acquisitions on operating

performance: Some Australian evidence”, Journal of Business Finance and

Accounting, Vol.29 (1, January, March): pp. 155-200.

Taxmann Companies Act: As amended by companies Act 2006: Company

Law and guide, Taxmann, 3rd

ed.

Weston J Fred (2005) Chung Kwang S, Merger, Restructuring and

Corporate Control, Prentice Hall, New Delhi.

Documents

Strategy 04 Latha Chari